Global finance for Indian takeovers

Critics of globalisation have long claimed that the West controls the world financial system and uses this to help Western multinationals to dominate the world. Think again. In the first nine months of 2006, Indian companies have made foreign acquisitions worth a whopping $ 7.6 billion, and the money for these acquisitions has come substantially from global financiers.

So, contrary to the neo-imperialist theory, the Western financial system is funding Indian (and Chinese) takeovers of Western MNCs. Globalisation is a two-way street that fosters competition rather than domination by any one country.

This week, Tata Steel announced that it was in talks to take over Corus, an Anglo-Dutch MNC with operations in 6 European countries. This will be India’s biggest foreign acquisition: Corus is valued at $ 10.4 billion. Two foreign banks have agreed to finance the deal.

The Oil and Natural Gas Corporation has been the biggest acquirer so far this year, driven by political directives to secure foreign sources of supply. It has made acquisitions in Brazil, Colombia, Sudan, Angola and Syria. The ONGC can access foreign loans easily since it is backed by an implicit government guarantee. But foreign banks, private equity funds and stock markets are now quite happy to provide billions to Indian private sector companies too

The Tata group has been easily the most aggressive globaliser. Tata Tea set the ball rolling by acquiring Tetley Tea, which was double its size. This was possible only because of global finance. Later Tata Tea acquired Eight O’clock Coffee, USA, for $ 220m., and last month acquired 30% of Glaceau, a US speciality waters company, for 677 m. Now, Tata Tea does not have a track record of exceptional profitability. But global financing has enabled it to swallow companies larger than itself.

Tata Steel has acquired National Steel of Singapore ($ 486 m.), Millennium Steel of Thailand ($ 404 m), and plans many more takeovers such as Corus. Tata Motors has acquired the truck assets of Korea’s Daewoo Motors and design-engineering firm INCAT.

The Ambanis, Birlas, Mahindras, Videocon� and most other� Indian majors have made foreign acquisitions. The top software and pharma companies have made multiple acquisitions. Dr Reddy’s Labs has acquired Betapharm of Germany for $ 572 million. Ranbaxy has acquired Terapia for $ 324 m.

Wockhardt, of the Khorakiwala group, says that foreign financiers are willing to fund $ 800 million of its takeovers. It has acquired four European companies so far—Wallis and CP Pharmaceuticals in UK, Esparma in Germany and Pinewood Labs in Ireland.

Wipro has become the leading foreign takeover specialist in software. It has bought five companies this year and is evaluating a dozen more. It has a “string of pearls” strategy, with Wipro as the string and acquisitions as the pearls.

I do not wish to bore readers with a full list of takeovers. Let me just emphasize that even small Indian companies have also been enabled by global finance to become MNCs.� Essel Packaging, once a humble maker of toothpaste tubes, took over Propack and has now become the world’s largest producer of laminated tubes with operations in a dozen countries. Small software companies have become big buyers: Subex Systems has acquired Azure Solutions, UK, for $ 140 m; and Sasken Tech has bought Botnia of Finland. Even Pidilite, maker of Fevicol, has operations in several countries.

How do Indian Davids manage to acquire foreign Goliaths? Through leveraged buy-outs, getting foreign loans for takeovers. Banks, hedge funds, private equity funds and many other financiers are eager to provide money. In some cases Indian companies have raised money from foreign capital markets by issuing Global Depository Receipts. The global financial system now believes that Indian companies will add value to MNCs they acquire abroad, and so is keen on accelerating the process.

Ten years ago, only the best Indian companies would have been able to borrow abroad, and only on stiff terms. Today they can get astonishingly low rates. Tata Motors was able this year to issue 5-year convertible yen notes at, effectively, a negative rate of interest! The notes carried zero interest, and would be redeemed after 5 years at 15% less than face value. Why then would anybody buy these? Because they were convertible into equity shares, at a price 30% higher than on the issuing day. .On such soft terms, Indian companies can take over the world.

Earlier, financiers would ask very tough questions about the viability of any Indian proposal. But today companies like Wockhardt and Bharat Forge can simply say that they want the money for foreign takeovers, and the dollars come pouring in. Why? Because Indian companies are now seen as globally competitive, even as some western MNCs are not. Reliance has a higher international credit rating than General Motors or Ford. It’s clear who should take over whom.

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I stumbled accross a case study, where a large integrated petrochemical company wanted to invest in modernising of an existing refinery in an African country. I was just wondering as to what would be the best way to finance a deal in that case. Would just raising the debt be a good option. Since the cost of debt is much lower than equity, I could raise a foreign currency debt (from US), use the historically low interest rate and come up with a really low discount rate that would make my NPV more attractive. Could you suggest if this is more viable than the mix of debt and equity financing and how exactly is equity raised by the acquirer in a foreign country where his firm is not listed.